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See detailDo Hedge Funds Supply or Demand Liquidity?
Jylhä, Petri; Rinne, Kalle UL; Suominen, Matti UL

in Review of Finance (2014), 18(4), 1259-1298

Regressing hedge funds’ returns on returns to a long–short contrarian trading strategy, a measure of the returns from providing liquidity, we find that hedge funds typically supply liquidity in the stock ... [more ▼]

Regressing hedge funds’ returns on returns to a long–short contrarian trading strategy, a measure of the returns from providing liquidity, we find that hedge funds typically supply liquidity in the stock market. In the cross-section, strict redemption restrictions and large fund size increase funds’ propensity to supply liquidity. In time series, poor market liquidity and good funding conditions increase funds’ propensity to supply liquidity. Although the hedge funds typically supply liquidity, during crises they demand liquidity. We also find that increases in the amount of speculative capital improve market liquidity and reduce the amount of short-term return reversals and volatility. [less ▲]

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See detailSystematic Trading Behavior and the Cross-Section of Stock Returns on the OMXH
Leung, Henry; Rose, Annica UL; Westerholm, P. Joakim

in Review of Finance (2014), 18(6), 2325-2374

Signed small trade turnover (SSTT) measures temporary uninformed buy or sell pressure that is initiated by small trades in the same direction. Using Nasdaq OMX Helsinki tick-by-tick trade data with known ... [more ▼]

Signed small trade turnover (SSTT) measures temporary uninformed buy or sell pressure that is initiated by small trades in the same direction. Using Nasdaq OMX Helsinki tick-by-tick trade data with known investor category, we confirm that SSTT is a robust proxy for uninformed trading. In the short term (1–3 months), stocks with a high proportion of signed small trades outperform, but in the medium (4–6 months) and long term (7–36 months), SSTT by individual investors has a negative correlation to stock returns, while SSTT by institutional investors and foreign nominees is not related to stock returns. Systematic trading behavior appears to better explain the excess return generated by the low SSTT portfolio relative to the high SSTT portfolio when compared to traditional risk factors in the CAPM and Fama-French models. In the aggregate, small trades are noise in the spirit of Kyle (1985) and Black (1986), but small trade behavior impacts the performance of individuals and not the performance of institutions. Large trades by both individuals and institutions perform better in the intermediate and long term, which lends some credibility to the practice of classifying larger trades as informed, but our results show that these trades are not always by institutions. [less ▲]

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